Do big countries always win a tariff war? A reappraisal

• Published date: 01 November 2018
• Author: Jean‐Marc Malambwe Kilolo
• DOI: http://doi.org/10.1111/rode.12525
• Date: 01 November 2018

REGULAR ARTICLE

Do big countries always win a tariff war? A

reappraisal

Jean-Marc Malambwe Kilolo

Université Pédagogique Nationale, Route

de Matadi/Avenue de la Libération

Quartier Binza/UPN, B.P. 8815, DR

Congo

Correspondence

Jean-Marc Malambwe Kilolo, Université

Pédagogique Nationale, Route de Matadi/

Avenue de la Libération Quartier Binza/

UPN, B.P. 8815, DR Congo

Email: malambwe@yahoo.com

Abstract

In their seminal paper, Kennan and Riezman (1988) show

that a “sufficiently”big country is better off under a tariff

war compared to free trade. This prediction derived in a

setting where market power stems from differences in

factor endowments, is somehow puzzling, as the majority

of free trade agreements notified to the GATT/WTO are

initiated by large rather than small economies. To resolve

this puzzle, I use a modified version of the Kennan and

Riezman (1988) model to show that the outcomes of a

tariff war depend not only on countries’endowment

sizes, but also on consumption requirements. In particu-

lar, free trade benefits two asymmetric countries if the

subsistence level of consumption in the large country is

sufficiently higher than in the small country. In addition,

free trade between symmetric countries may harm the

country with a lower subsistence level of consumption.

The theoretical framework presented in this paper

supports the idea that even small countries enjoy some

market power and thus helps understand why large

economies seek free trade in natural resources with

smaller commercial partners.

PACS

F15, F35

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INTRODUCTION

Conventional wisdom suggests that a “sufficiently”big country always wins a tariff war; in other

words, a “large economy”has a market power over its small counterpart and then can manipulate

its terms of trade. This implies that the “big country”increases its welfare by imposing a tariff

DOI: 10.1111/rode.12525

Rev Dev Econ. 2018;22:e239–e249. wileyonlinelibrary.com/journal/rode © 2018 John Wiley & Sons Ltd

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e239